Still a long way to go for house builders

A shrewd old stockbroker of my acquaintance recommended to his clients a month ago that they should buy housebuilders' shares, but with three caveats.

Buy a selection of them, he said, because several were almost certain to go bust or be recapitalised in ways very disadvantageous to existing shareholders, so buyers needed to be willing to take this kind of loss in their stride. Second, they should be prepared to wait three or four years before they would see a serious recovery. Third, in the meantime the shares could easily go lower, although at the time of his writing they were mostly down already by between 60% and 80% from their highs of 18 months ago.

He is probably right - on the timing - but I am less sure about the rest. Though optimists say the first phase of the credit crunch is drawing to a close, it is also easy to argue that the banks have still declared only half their likely losses and it could take another year for this to work through and for transparency and trust to return properly to the financial system.

It could also be another year before home mortgage finance begins to loosen up. Not that the floodgates will open when the market does come back, because many of the most aggressive borrowers have closed their doors, probably for good, and those who are left have little interest in a return to the cut-throat competition of recent years.

Even when the market does return, it is likely mortgages will cost more, and require much bigger deposits from borrowers. It will be a long time before house prices stabilise and buyers have the confidence as well as the money to come back in.

Builders should use this lean time to think hard about what they have been building. The vast majority of homes built in recent years have been flats in inner-city areas. The top end has been great for urban regeneration in cities such as Leeds, but a lot of the cheaper stuff sold only because it was fuelling the buy-to-let market. They are going to take a long time to shift.

What this means is that investors should not get too excited about the signs of new capital going into the builders. The money will buy them time, just as new capital has bought the banks time. But it may not be enough. They still have a huge litany of problems to work through.

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It is unwise to bet against WPP chief executive Sir Martin Sorrell when he wants something - and he certainly seems to want to take over Taylor Nelson Sofres, or TNS, the market research group which thus far has expressed a preference for a nil-premium merger with its big rival in European market research, GfK of Germany.

Not that Sorrell is getting everything his own way. In TNS chairman Don Brydon he is up against someone who is not only steeped in the ways of the City but also knows a bit about how to sell companies - having been recently on the board of Scottish Power when it went to the Spanish and Allied Domecq before that when it went to the French.

Indeed, if there is a criticism of Brydon it is that his background in fund management makes him too easily inclined to selling out as a way to deliver quick and significant increases in shareholder value, though he has resisted calls to break up and sell Smiths, the engineering group where he is also chairman. That said, however, and though he is architect of the German merger and very much committed to it publicly, one suspects there is little he would like more than to see Sorrell come in and make an auction of it.

We are not there yet though, because ownership on the German side is complicated by a trust whose basic purpose as I understand it is to safeguard the academic integrity and purity of the work done by the German business. That's not a concept one comes across often in the City these days but it might prompt shareholders to vote against the offer. Smoke signals to this effect were spotted over Germany yesterday and interpreted by Sorrell as creating uncertainty as to the trust's position.

In his view, shareholders should not be expected to vote on a proposal when there remains this fundamental uncertainty as to whether it is actually deliverable. That is a fair point - though Sorrell could also help concentrate minds by delivering a firm offer himself. As long as he does not, there will always be an element of doubt over whether he does really want TNS for himself or whether he would simply be happy to stop it going to the Germans.

So we have Brydon saying he wants the German deal, but probably hoping WPP gets involved, and Sorrell saying he might get involved, while he is perhaps more interested in simply killing the deal. Oh, what tangled webs...